Enhancing the role of the SDR
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In the aftermath of the 2008 crisis, many proposals were raised to reform the functioning of the international monetary system, especially concerning the deepening of the SDRs as a reserve asset in order to provide liquidity in times of financial turmoil. It was even put forward that regular SDR allocations could be useful to support the development of low-income countries regardless of the phase of the business cycle. This chapter examines these issues using a four-country SFC model. China and the rest of the world peg their currencies with respect to the dollar while the euro floats freely. In order to test the effects of the introduction of the SDRs as a reserve asset different types of simulations are run. A first set of simulations attempts to compare the current system with a scenario where there is a coordinated decision to enhance the role of the SDRs with regular emission. The second set of simulations aims at comparing the current system with a one where SDRs are issued counter-cyclically in times of global recession. In itself, the emission of SDRs is not enough to bring about a recovery but it gives room of manoeuvre to national governments when they wish to implement more expansionary policies.